Although income tax changes would be a good first step towards a global meritocracy, far bigger steps toward that goal are possible through the establishment of global equality of opportunity. I think that the clarity I see on this issue compared to the others makes it one of the most important goals to focus on in the 21st century.
Unlike my proposed income tax changes, which would affect 167,000 people (166,000 high income earners in Canada making over $250,000/yr and 1000 contribution-prize winners), global equality of opportunity has the potential to help 95% of the people on the planet. Even if my income tax provisions were applied globally, they would probably affect less than 5% of the world population. Therefore, this goal has to be considered much more critical.
As I outlined in the first post of this series, I see two major components necessary to achieving global equality of opportunity. The first one is obtaining equality of opportunity between countries. Significant progress has already been made on this goal, with many more countries being welcomed into the developed world in the last 50 years. Chinese and Indian incomes are rising fast, and their educational systems are sufficiently robust that most children in China, and a significant number in India, now have the foundation necessary to accomplish virtually any goal they may set for themselves.
In China and India, the work that remains to be done is the equalization of probabilities - that is, it is still much more likely that an American kid will grow up to be rich and powerful compared to his Chinese counterpart. This equalization will gradually materialize if China and India continue to integrate globally and pursue sensible economic policies, and the west should encourage that rather than fear it.
There are a number of other countries, however, where the probabilities of achieving a western standard of living are infinitesimal for most people. In China and India, to some extent, we can stand by and watch the global market begin to equalize opportunities and standards of living, but for other countries, more help will be required.
The countries that are the farthest from equality of opportunity are primarily located in Africa and Central/Western Asia. The biggest common denominator among them is the lack of an adequate education system, but other commonalities include high birth rates, corruption and AIDS prevalence. These are all issues we can do something about.
In terms of education, my belief is that a large percentage of our foreign aid should be going towards the development of secular education systems in these countries. Ideally this would be done in conjunction with a Canadian civil service program, as I discussed in my post Across the Sea. Intense political pressure should be applied to all these countries, particularly with respect to education of girls, as many studies have shown that education of girls is extremely effective at lowering birth rates and fostering development. Health care and microfinance would also be key initiatives, as the above linked post describes.
In tandem with this, we should aim to bring these countries into the global economy more effectively, especially with regard to trade. As I have previously pointed out, the competitive advantage that many of these countries have is in agriculture. The elimination of agricultural subsidies in developed countries could go a long way towards bringing some of the world's poorest countries forward.
Those few initiatives will not be enough, but they would be a good start. Further initiatives could come from looking at the experiences of successful developing countries in Asia and Eastern Europe and modelling development of their experiences. As ardent of a free-trader as I typically am, I recognize that the evidence does show that some protectionism in the early stages of development followed by a later entry into global markets has been very successful in places like South Korea, Taiwan and even China. There are other lessons that can be learned from the experiences of those countries as well.
A final obstacle to the type of global integration that would bring about true equality of opportunity is the fragmented worldwide immigration system. I believe that the ideal we should be aiming for on immigration is of a free flow of people between nation-states, with those states essentially competing for the best people worldwide. People would be able to go to the country whose moral and organizational systems most appealed to them, and this would encourage countries to provide high-performance government as they would be essentially forced to compete for human capital in a competitive market.
Such a system is not possible in today's world, because economic disparity is still too great. If free migration was allowed, the massive influx of immigrants would destabilize the developed countries and destroy the societies that those immigrants wanted to participate in in the first place. For this reason, I think that the first priority has to be equalizing levels of development globally, which can then be followed by the loosening of immigration rules. However, it would not be a bad idea for developed countries to continue relaxing restrictions on immigration, perhaps with the intermediate-term goal of having a relatively open labour market within the OECD. I still have a lot of thinking to do on short-medium term immigration policy before I can get much more specific than that.
Although achieving a more equal balance between countries is probably more critical, equality of opportunity within countries is also important, and I will address that in my next post.
Showing posts with label economics. Show all posts
Showing posts with label economics. Show all posts
Wednesday, September 7, 2011
Wednesday, May 12, 2010
The 22nd Century Economy (1 of 10)
As much as we like to present history as a series of distinct epochs, in most cases that is an artificial simplification. Within individual societies throughout history, and now in our global society, different periods of history tend to blend together.
Each period of history can be seen as both an outgrowth of its predecessor and as a lead-up to its successor. I believe that most people throughout history have seen their own age as a transitory one, bridging the storied past and the uncertain future; I also believe that this is a healthy outlook because it creates a mindset for advancement and change.
As I have previously said, I believe that it is difficult to form forward-looking policy without a coherent vision of your goal. I believe that this is one of the reasons much government policy remains reactive, because politicians do not have, cannot articulate, or will not disclose their visions of the future.
I aim to be different. I have said before that my long-term environmental vision is of people living in urban "islands", surrounded by mostly unspoiled landscape. That vision drives much of my environmental policy. I want to expand on this vision of the future and discuss some other policy areas from a viewpoint of creating proactive policies that work toward identifiable goals.
In this post, I will start with the economy. I have referred to it as the 22nd century economy because I see our current system as being the 21st century economy, the successful but flawed basis which leads into the next age. I see the 23rd century economy as the "ideal" that the next age will play a part in ushering in. The time scales involved may be longer or (somewhat) shorter, I have simply used the 23rd century as the ideal in homage to Star Trek, which presents a vision of an ideal economy where scarcity no longer applies, people are driven by contribution rather than profit, and merit is the determining factor of success.
What we have now is a nascent global economy, artificially divided into ~200 nation-states, most with some form of mixed market system, combining capitalist economics with a moderately interventionist state. A little over half these states have some form of democratic political system, with the rest being authoritarian.
As I have said many times before, the current system is not in need of wholesale change, as it has been proven to be very efficient and has drastically improved living standards across the board. It can and will, with appropriate guidance, continue to improve life for humanity and bring us closer to our goals.
However, the system should also not remain static, because a fragmented, mixed capitalist economy is not equipped to transform into a global, democratic post-capitalist meritocracy, even if fusion power and replicators (scarcity-eliminating matter-energy conversion devices) were invented and perfected tomorrow.
I believe our attitude should be one of gradual change and improvement, constantly attempting to make our system one that will bridge the gap between the present and the future.
The obvious question then becomes, what will this "bridge" economy look like? What kind of system can reduce the problems we face today while simultaneously preparing for a post-scarcity economy and thriving in one where scarcity still applies?
I think we can start by identifying some of the things in the current system that will have to change to reach the long-term vision. Once we have incorporated those adjustments, we can work from there to complete the transitional framework.
Here are some of the problems I see with our current system:
1. The biggest problem is the inability of pure capitalism to price in externalities, that is, effects that economic transactions have on third parties. I have said before that in our system I believe governments must do their best to manage these externalities, but it is possible there is a better way.
2. A related problem is the tragedy of the commons, where a common resource (like fishing stocks or water) is overexploited because it is available to all. Again, government regulation has been the default (and relatively unsuccessful) solution to this problem, although some other novel approaches have been proposed, such as simply privatizing ownership of all resources, removing the incentive to overexploit.
3. The second great challenge we face, as I have mentioned before, is the reconciliation of profit with contribution. If we are move toward a true meritocracy, two things must happen. We must have equality of opportunity, and we must solve this problem. This will be a tricky one to solve, primarily because people don't agree on what constitutes contribution
4. Speaking of equality of opportunity, it is a necessity and we don't have it. There have been significant strides made in this area, but there is still a long way to go. Differences need to be eliminated between countries and within them. The two major sub-problems here are the lack of global economic and political integration disadvantaging people in certain countries as well as the neo-aristocracy created through inherited wealth.
There is progress being made on the first issue, through gradual increase in worldwide development as well as through political and economic integration. It is the second problem that really causes me grief.
I strongly believe that the majority of people who work their way to extreme wealth deserve to have such wealth, because they have indeed made contributions. Probably the opposite is true for so-called "trust fund kids". My observations suggest that the massive wealth they inherit tends to be a deterrent to contribution, rather than an enabler. There are exceptions, but they are rare. To solve this problem, I have previously advocated a heavy estate tax, but I am cognizant of the enforcement problems with estate taxes. A different approach may be necessary here.
5. Capitalism in its current form seemingly disincentivises efficiency in some ways. This is a curious problem, but it is pervasive. Presumably, most people would rather work less, and less time spent on low-skill activities would theoretically free up additional man-hours for more "contribution-added" activities. However, the trend in capitalist societies has been towards more work, not less, and employment economics are such that many people (and unions) are actually strongly opposed to changes that would replace human labour with machine power.
A related problem involves technologies that are more efficient, but more expensive. The energy efficiency of nuclear power, for example, is much higher than other alternatives, but its use is still relatively limited because of the cost. This disconnect between economic efficiency and technological efficiency is an interesting one, which I will have to give more thought to.
6. There is a small disconnect between our current form of capitalism and the democratic ideals we claim to value. The corporation, pervasive in today's capitalism because of its unique ability to raise large amounts of capital from strangers, is not a democratic beast. As a result, many people spend half (or more) of their waking hours in what is essentially an authoritarian environment. It would seem that we would want to move away from this if we could.
7. The last issue I will discuss is a controversial one, because of the atrocious evil that has been associated with perverse forms of the idea in the past. I thought long and hard about whether or not I should include it at all, and am fully expecting people to twist my words and crucify me for them. However, it is a real issue, and I can't not mention it.
This issue is evolution. I would argue that human evolution has been affected by the advent of industrial capitalism and modern medicine. I don't think its revolutionary to believe that there are certain genetic traits that we have an interest in promoting or preventing, mostly to do with inheritable diseases, but also traits like intelligence. It would seem self-evident that since intelligence (for example) is a trait almost universally valued across societies, and absolutely necessary for the survival and expansion of the human race, that we would want to make sure that the next generation is as intelligent as possible. It seems to me, however, that in developed countries, the smartest people are having fewer and fewer children.
By now, half of you are probably thinking I'm about to advocate Nazi-era policies of forced sterilization and the other half are probably thinking "I have five kids so he's saying I am dumb". I am not saying either of these things. I violently oppose the kind of restrictions on freedom and the loss of human dignity that are necessary for the first, and the second is not true in many, many cases, and is only a statistical argument. I am merely trying to say that if each successive generation is becoming less and less intelligent, that is (or will be) a serious problem and one that we should at least discuss in a reasonable fashion.
In the next few posts, I will discuss these problems further and try to point out some potential ways forward. Frankly though, I don't have very many answers yet, and these are tough problems.
As a sidebar, I have been reading about something called Economic Democracy, which is what got me thinking about the dynamics of a post-capitalist economy. Basically the idea is to retain a market economy, but replace corporations with worker-run cooperatives, which would borrow money from state-owned banks based on previous success and (possibly) how the objective of the business conformed with state goals. The cooperatives would pay a flat capital asset tax to the state. It is an interesting idea, and some of the ideas it presents deserve a long, hard look, but it suffers from three main problems in my view:
1. It would not be feasible to establish this system before worldwide political integration has been achieved. The very nature of the system precludes foreign investment, and it would substantially damage the economy through the loss of global application of comparative advantage. It would also reinforce national standard-of-living differences.
2. A worker-run system would suffer even more from a tendency to reject labour saving technologies in favour of inefficiency.
3. The capital allocation decisions made by the state owned banks make me very skeptical. I highly doubt that these decisions would be made effectively because of political interference and the historical inability of government bureaucrats to make good decisions on similar matters.
I will come back to Economic Democracy in later posts.
Each period of history can be seen as both an outgrowth of its predecessor and as a lead-up to its successor. I believe that most people throughout history have seen their own age as a transitory one, bridging the storied past and the uncertain future; I also believe that this is a healthy outlook because it creates a mindset for advancement and change.
As I have previously said, I believe that it is difficult to form forward-looking policy without a coherent vision of your goal. I believe that this is one of the reasons much government policy remains reactive, because politicians do not have, cannot articulate, or will not disclose their visions of the future.
I aim to be different. I have said before that my long-term environmental vision is of people living in urban "islands", surrounded by mostly unspoiled landscape. That vision drives much of my environmental policy. I want to expand on this vision of the future and discuss some other policy areas from a viewpoint of creating proactive policies that work toward identifiable goals.
In this post, I will start with the economy. I have referred to it as the 22nd century economy because I see our current system as being the 21st century economy, the successful but flawed basis which leads into the next age. I see the 23rd century economy as the "ideal" that the next age will play a part in ushering in. The time scales involved may be longer or (somewhat) shorter, I have simply used the 23rd century as the ideal in homage to Star Trek, which presents a vision of an ideal economy where scarcity no longer applies, people are driven by contribution rather than profit, and merit is the determining factor of success.
What we have now is a nascent global economy, artificially divided into ~200 nation-states, most with some form of mixed market system, combining capitalist economics with a moderately interventionist state. A little over half these states have some form of democratic political system, with the rest being authoritarian.
As I have said many times before, the current system is not in need of wholesale change, as it has been proven to be very efficient and has drastically improved living standards across the board. It can and will, with appropriate guidance, continue to improve life for humanity and bring us closer to our goals.
However, the system should also not remain static, because a fragmented, mixed capitalist economy is not equipped to transform into a global, democratic post-capitalist meritocracy, even if fusion power and replicators (scarcity-eliminating matter-energy conversion devices) were invented and perfected tomorrow.
I believe our attitude should be one of gradual change and improvement, constantly attempting to make our system one that will bridge the gap between the present and the future.
The obvious question then becomes, what will this "bridge" economy look like? What kind of system can reduce the problems we face today while simultaneously preparing for a post-scarcity economy and thriving in one where scarcity still applies?
I think we can start by identifying some of the things in the current system that will have to change to reach the long-term vision. Once we have incorporated those adjustments, we can work from there to complete the transitional framework.
Here are some of the problems I see with our current system:
1. The biggest problem is the inability of pure capitalism to price in externalities, that is, effects that economic transactions have on third parties. I have said before that in our system I believe governments must do their best to manage these externalities, but it is possible there is a better way.
2. A related problem is the tragedy of the commons, where a common resource (like fishing stocks or water) is overexploited because it is available to all. Again, government regulation has been the default (and relatively unsuccessful) solution to this problem, although some other novel approaches have been proposed, such as simply privatizing ownership of all resources, removing the incentive to overexploit.
3. The second great challenge we face, as I have mentioned before, is the reconciliation of profit with contribution. If we are move toward a true meritocracy, two things must happen. We must have equality of opportunity, and we must solve this problem. This will be a tricky one to solve, primarily because people don't agree on what constitutes contribution
4. Speaking of equality of opportunity, it is a necessity and we don't have it. There have been significant strides made in this area, but there is still a long way to go. Differences need to be eliminated between countries and within them. The two major sub-problems here are the lack of global economic and political integration disadvantaging people in certain countries as well as the neo-aristocracy created through inherited wealth.
There is progress being made on the first issue, through gradual increase in worldwide development as well as through political and economic integration. It is the second problem that really causes me grief.
I strongly believe that the majority of people who work their way to extreme wealth deserve to have such wealth, because they have indeed made contributions. Probably the opposite is true for so-called "trust fund kids". My observations suggest that the massive wealth they inherit tends to be a deterrent to contribution, rather than an enabler. There are exceptions, but they are rare. To solve this problem, I have previously advocated a heavy estate tax, but I am cognizant of the enforcement problems with estate taxes. A different approach may be necessary here.
5. Capitalism in its current form seemingly disincentivises efficiency in some ways. This is a curious problem, but it is pervasive. Presumably, most people would rather work less, and less time spent on low-skill activities would theoretically free up additional man-hours for more "contribution-added" activities. However, the trend in capitalist societies has been towards more work, not less, and employment economics are such that many people (and unions) are actually strongly opposed to changes that would replace human labour with machine power.
A related problem involves technologies that are more efficient, but more expensive. The energy efficiency of nuclear power, for example, is much higher than other alternatives, but its use is still relatively limited because of the cost. This disconnect between economic efficiency and technological efficiency is an interesting one, which I will have to give more thought to.
6. There is a small disconnect between our current form of capitalism and the democratic ideals we claim to value. The corporation, pervasive in today's capitalism because of its unique ability to raise large amounts of capital from strangers, is not a democratic beast. As a result, many people spend half (or more) of their waking hours in what is essentially an authoritarian environment. It would seem that we would want to move away from this if we could.
7. The last issue I will discuss is a controversial one, because of the atrocious evil that has been associated with perverse forms of the idea in the past. I thought long and hard about whether or not I should include it at all, and am fully expecting people to twist my words and crucify me for them. However, it is a real issue, and I can't not mention it.
This issue is evolution. I would argue that human evolution has been affected by the advent of industrial capitalism and modern medicine. I don't think its revolutionary to believe that there are certain genetic traits that we have an interest in promoting or preventing, mostly to do with inheritable diseases, but also traits like intelligence. It would seem self-evident that since intelligence (for example) is a trait almost universally valued across societies, and absolutely necessary for the survival and expansion of the human race, that we would want to make sure that the next generation is as intelligent as possible. It seems to me, however, that in developed countries, the smartest people are having fewer and fewer children.
By now, half of you are probably thinking I'm about to advocate Nazi-era policies of forced sterilization and the other half are probably thinking "I have five kids so he's saying I am dumb". I am not saying either of these things. I violently oppose the kind of restrictions on freedom and the loss of human dignity that are necessary for the first, and the second is not true in many, many cases, and is only a statistical argument. I am merely trying to say that if each successive generation is becoming less and less intelligent, that is (or will be) a serious problem and one that we should at least discuss in a reasonable fashion.
In the next few posts, I will discuss these problems further and try to point out some potential ways forward. Frankly though, I don't have very many answers yet, and these are tough problems.
As a sidebar, I have been reading about something called Economic Democracy, which is what got me thinking about the dynamics of a post-capitalist economy. Basically the idea is to retain a market economy, but replace corporations with worker-run cooperatives, which would borrow money from state-owned banks based on previous success and (possibly) how the objective of the business conformed with state goals. The cooperatives would pay a flat capital asset tax to the state. It is an interesting idea, and some of the ideas it presents deserve a long, hard look, but it suffers from three main problems in my view:
1. It would not be feasible to establish this system before worldwide political integration has been achieved. The very nature of the system precludes foreign investment, and it would substantially damage the economy through the loss of global application of comparative advantage. It would also reinforce national standard-of-living differences.
2. A worker-run system would suffer even more from a tendency to reject labour saving technologies in favour of inefficiency.
3. The capital allocation decisions made by the state owned banks make me very skeptical. I highly doubt that these decisions would be made effectively because of political interference and the historical inability of government bureaucrats to make good decisions on similar matters.
I will come back to Economic Democracy in later posts.
Thursday, November 20, 2008
No Such Thing As A Free Lunch
The issue of governments bailing out corporations has been a contentious one of late, and I thought I would offer some thoughts on the matter. In my view, there are two conflicting motivations on this issue
1. Firms that take excessive risk or firms that cannot compete in the marketplace must be allowed to fail. If they know they will be bailed out, it only encourages further risk-taking, because all the upside is there but the downside is effectivley limited. If risky or uncompetitive firms are allowed to survive, they will eventually damage the entire framework of capitalism.
2. Governments have an important role to play in protecting their citizens from large-scale problems that affect them, but were not of their own making. If a major commercial bank were to fail, for example, many consumers would be at risk of losing their deposits, investments and insurance. In this case, the need to protect consumers outweighs the need to punish firms that take risk. However, it must be clear that these corporations, as vital as they are, cannot expect a free lunch.
Applying these two principles to the current situation, one can see that some of the bailouts that have happened were undoubtedly necessary. The AIG bailout is a good example of this. Additionally, the use of public funds to buy securitized mortgages from ailing banks strikes a good balance of helping these institutions well still providing taxpayers with the potential of getting their money back eventually.
Conversley, I strongly disagree with some of the actions that have been taken, as well as some that might occur in the future. Bailing out investment banks, for example, is something I am strongly against. The collapse of these institutions would result in reletively low impact on third parties, and their faliure would strongly disincitivise mispricing of risk in the future.
On a similar note, U.S. automakers should not be bailed out forever. They are far-reaching enough that a one-time rescue might have been justified, but problems will not be solved by throwing money at uncompetitive firms. That will only delay the inevitable. The detroit automakes have had plenty of time and money to try and turn things around, and have failed. It is time for them to either consolidate or break apart, into units that can be competitive again.
To this point, we have not seen serious problems with industries other than finance, insurance and manufacturing, but if we do, I hope that any potential bailout will only target industries whose collapse would severly damage the livelihoods of a majority of third-party citizens. Our money is better spent on other things than on propping up bad gambles by investment banks or uncompetitive automakers.
For $700 billion we could put a man on Mars, and I'd rather do that than save the jobs of I-Banking execs who've pulled in seven figure bonuses for each of the last 6 years. So that better not be where that money goes.
1. Firms that take excessive risk or firms that cannot compete in the marketplace must be allowed to fail. If they know they will be bailed out, it only encourages further risk-taking, because all the upside is there but the downside is effectivley limited. If risky or uncompetitive firms are allowed to survive, they will eventually damage the entire framework of capitalism.
2. Governments have an important role to play in protecting their citizens from large-scale problems that affect them, but were not of their own making. If a major commercial bank were to fail, for example, many consumers would be at risk of losing their deposits, investments and insurance. In this case, the need to protect consumers outweighs the need to punish firms that take risk. However, it must be clear that these corporations, as vital as they are, cannot expect a free lunch.
Applying these two principles to the current situation, one can see that some of the bailouts that have happened were undoubtedly necessary. The AIG bailout is a good example of this. Additionally, the use of public funds to buy securitized mortgages from ailing banks strikes a good balance of helping these institutions well still providing taxpayers with the potential of getting their money back eventually.
Conversley, I strongly disagree with some of the actions that have been taken, as well as some that might occur in the future. Bailing out investment banks, for example, is something I am strongly against. The collapse of these institutions would result in reletively low impact on third parties, and their faliure would strongly disincitivise mispricing of risk in the future.
On a similar note, U.S. automakers should not be bailed out forever. They are far-reaching enough that a one-time rescue might have been justified, but problems will not be solved by throwing money at uncompetitive firms. That will only delay the inevitable. The detroit automakes have had plenty of time and money to try and turn things around, and have failed. It is time for them to either consolidate or break apart, into units that can be competitive again.
To this point, we have not seen serious problems with industries other than finance, insurance and manufacturing, but if we do, I hope that any potential bailout will only target industries whose collapse would severly damage the livelihoods of a majority of third-party citizens. Our money is better spent on other things than on propping up bad gambles by investment banks or uncompetitive automakers.
For $700 billion we could put a man on Mars, and I'd rather do that than save the jobs of I-Banking execs who've pulled in seven figure bonuses for each of the last 6 years. So that better not be where that money goes.
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